HBOS, Lloyds and the S&L crisis


The £10bn loss at Halifax Bank of Scotland – one of the UK's retail banks most affected by sub-prime mortgage debt – shows the folly of government policy once again. HBOS and Lloyds had been contemplating a merger for some time. They both thought it would be nice to become Britain's biggest bank group. But government anti-monopoly legislation stood in the way. The credit crunch gave them the perfect excuse to push ahead, and get the government to suspend its own rules. With banks dropping like flies, they argued, we need to be big to survive. Gordon Brown delightedly waived through the merger.

Now HBOS's losses have caused the new group's shares to plummet. The disaster could drag Lloyds – which used to be in a more robust position – into full-scale public ownership too.

It all reminds me so much of the mid-80s Savings and Loan crisis in the United States. For a number of reasons – including the fact that Congress had forced them to give mortgages to people who couldn't repay them – the Savings and Loan sector got into deep difficulties. There were collapses all round. So the Federal government encouraged them to merge, on the same principle that size saves. What it did, of course, was to create lenders that were 'too big to fail' – in other words, lenders who would have to be bailed out by taxpayers when they inevitably did fail. Not surprisingly, the US financial sector then went from bad to worse.

Ours is doing the same. We need smaller banks, not larger. Then if one goes down it's a business tragedy, but not a financial disaster. Instead, Gordon Brown's heavyweight regulation has forced the banks to merge and grow, because only the largest can actually afford the armies of regulatory compliance officers that banks need these days. So now we have mega-banks which the government simply has to prop up, because letting them fail would rupture the whole economy. Governments never learn.

Eamonn Butler's new book, The Rotten State of Britain is published in March.